A collection of resources and commentary providing an introduction to supply chain management and related systems for students, practitioners, and anyone else interested in learning more about how to design, manufacture, transport, store, deliver, and manage products.

Tuesday, January 22, 2013

Pirates of the Global Supply Chain

Last week’s article, Stress Test for the Global Supply Chain, focused
on how the tsunami in Japan affected Hewlett Packard’s (HP) global supply
chain. HP’s computer industry, which depends on Japan for electronic
parts and equipment, was hit hard when manufacturing plants shut down
for days on end. A report by Zurich Insurance Ltd indicated that global supply
chains faced over 2,500 disruptions in the last decade.[1]
Disruptions include natural disasters, labor strikes, lead time variability,
fires etc. Research then led me to a fascinating report on how Somali piracy
was disrupting and threatening supply chain security around the globe. In this week’s blog
post, I have decided to focus on this unique problem and its effects on global
supply chains.

Piracy
in the global supply chain

Hollywood’s rendition of piracy
and its romanticized portrayal of pirates is a far cry from reality! Today,
Somali piracy is a major scourge is some important trade routes along the Indian
Ocean, Gulf of Aden, South China Seas etc.[2]
Somali pirates, equipped with potent weapons like AK-47s and hand grenades,
attack civilian ships, capture crew members, resell high-value cargo goods and
hold hostages for ransom.[3]In the Horn of Africa alone,
piracy has caused losses amounting to almost $6 billion.[4]
Piracy not only makes international trade risky, but it also reduces the
efficiency and functionality of global supply chains. Some direct effects
include:

2.
Rising transportation costs-- To avoid clashes with pirates, several
shipping companies have revised transportation routes. Rerouting vessels can
have drastic financial impacts. Since these routes require more fuel, they can
increase transportation expenses by $15 billion/year.[5]

3.
Long lead times-- New, revised routes are usually longer
and take more time. In order for goods to arrive safely, transportation could
take 3-4 extra weeks. Overall, this makes the supply chain take longer than
necessary.

4.
Increasing insurance premiums--Due to higher risk of pirate attacks
along shipping routes, shipping companies are paying way more in insurance
premiums. Originally, shippers paid $500/voyageage for a vessel as premium. Today,
insurance costs have escalated to $20,000/voyage.[6]In order to make up for increased expenses, shipping companies probably
charge more, increasing the price of end products.

5.
Threat to human life-- Piracy also poses a threat to the
labor involved in supply chains. Due to the risks associated with
transportation, crew-members are harder to recruit and also charge higher
salaries. This in-turn increases the costs associated with shipping.

6.
Ransoms-- In addition to increasing shipping rates, piracy has
aggravated the effects of the economic crisis on supply chains. The global
economic crisis caused a decrease in consumption of goods, which reduced the
number of cargo vessels being shipped. This meant that shipping companies had
to lower prices to stay competitive. Smaller profits reduced cash flows. To
make things worse, shipping companies are required to pay large ransoms to free
captured ships. This could bankrupt shipping companies and threaten their very
existence, majorly disrupting the supply chain.[7]

As we can see, supply chain
piracy poses a very unique problem--one that cannot be solved by a
manufacturer, seller, shipper, or even a government. This problem calls for
concerted efforts between governments of several countries and even
international agencies. To solve this problem in the long term, we will have to
address the root cause of this issue: impoverished circumstances that push
people to resort to piracy. This may take years and even decades. Manufacturers
and shipping companies will continue to lose money if this problem is not
addressed soon. Is there a short-term solution to this problem? A quick-fix companies
could employ to reduce losses?